An ARM note sets the rate at the 30-day average SOFR plus a 2.75 margin, with SOFR at 4.10 on the adjustment date. What is the fully indexed rate before applying any contractual adjustment caps?
Correct Answer
D) The fully indexed rate is 6.85%, before any of the 3 caps are applied
Index plus margin gives the fully indexed rate, 4.10 plus 2.75 or 6.85%, and the caps are then applied to see what the borrower actually pays. Other choices: the index alone leaves out the margin, and the margin alone leaves out the index; and the caps very much apply, which is the whole point of computing the fully indexed rate first. Source: Fully indexed rate: index plus margin
Why This Is the Correct Answer
Index plus margin gives the fully indexed rate, 4.10 plus 2.75 or 6.85%, and the caps are then applied to see what the borrower actually pays. Other choices: the index alone leaves out the margin, and the margin alone leaves out the index; and the caps very much apply, which is the whole point of computing the fully indexed rate first. Source: Fully indexed rate: index plus margin
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